Explanatory Memorandum(Circulated by authority of the Minister for Revenue and Financial Services Minister for Women Minister Assisting the Prime Minister for the Public Service the Hon Kelly O'Dwyer MP)
Chapter 2 - Extending tax relief for merging superannuation funds
Outline of chapter
2.1 Schedule 2 to this Bill amends the ITAA 1997, the SLAA 2012 and the TLAA 2010 to extend tax relief for merging superannuation funds until 1 July 2020.
2.2 All references in this chapter are to the ITAA 1997 unless otherwise specified.
Context of amendments
2.3 CGT is the primary code for calculating gains or losses of complying superannuation funds. There are certain gains and losses that are treated on revenue account, such as those from a debenture stock or bond (see section 295-85).
2.4 The transfer of assets from one superannuation fund to another, under a merger between the two funds, will typically trigger a CGT event. Therefore, the asset transfer will lead to the realisation of capital gains and/or capital losses for the transferring fund. Following this asset transfer and the transfer of members' accounts to the receiving fund, the transferring fund will typically be wound up.
2.5 Capital losses are extinguished on the ending of an entity. As capital losses can be used to offset present and future capital gains, they carry some value - at most the value of the tax liability that would otherwise be payable on the reduced capital gains. This value is extinguished on the winding up of the transferring superannuation fund.
2.6 Similarly, revenue losses, such as foreign exchange losses, are also extinguished on the ending of an entity. Revenue losses also have a value as they can be offset against current year income, or carried forward where the entity continues to exist. However, where there is a merger and the transferring entity ceases to exist, the value of the revenue losses is also extinguished.
2.7 Valuations of members' superannuation interests may include the tax benefits of unrealised net capital losses or revenue losses. In the absence of optional loss relief and asset roll-over a merger may lead to a reduction in the value of members' superannuation interests. This can act as an obstacle to the superannuation fund merging with another fund because the trustee has to take this reduction into account when considering such a merger. The trustee may decide to abandon any merger plans where there is a significant negative impact on members' benefits. The optional loss relief and asset roll-over removes the impediment to eligible funds merging that would otherwise arise from the extinguishment of the losses.
2.8 This loss relief encompasses transfers to and from pooled superannuation trusts and life insurance companies as well as superannuation funds and approved deposit funds. Providing the loss relief to superannuation fund mergers involving these kinds of entities recognises the commercial reality that a significant amount of superannuation is invested indirectly through pooled superannuation trusts and life insurance companies.
2.9 The loss relief and asset roll-over in Division 310 was introduced as a temporary concession to assist the superannuation industry to cope with the severe economic and financial market conditions in late 2008. The temporary loss relief and asset roll-over was granted for transfer events happening on or after 24 December 2008 and before 1 October 2011.
2.10 The tax relief was first extended to 30 September 2011 to further encourage consolidation in the superannuation industry. The relief was then further extended to apply to mergers from 1 October 2011 to 1 July 2017 to facilitate the implementation of the MySuper reforms. The extension of the relief was designed to ensure there were no barriers for the superannuation industry to respond to the MySuper changes.
2.11 Tax considerations are a major impediment to mergers as trustees of superannuation funds must consider the adverse tax impacts on members' accounts. Although a merger may be in the long-term interest of members, the effect on members' account balances may preclude this from happening.
2.12 In the 2017-18 Budget, the Government decided to extend the temporary taxation relief in the form of loss relief and asset roll-over for mergers of superannuation funds as this will ensure members' balances are not adversely impacted by mergers.
Summary of new law
2.13 Schedule 2 to this Bill amends the ITAA 1997, the SLAA 2012 and the TLAA 2010 to extend the tax relief for merging superannuation funds available under Division 310 until 1 July 2020.
2.14 The tax relief which includes loss relief and asset roll-over removes income tax impediments to mergers between complying superannuation funds by permitting the roll-over of both revenue gains or losses and capital gains or losses.
Comparison of key features of new law and current law
|New law||Current law|
|A merging superannuation fund may choose loss relief and have access to asset roll-over where the transferring entity transfers assets to the receiving entity on or after 1 October 2011 and before 2 July 2020.||A merging superannuation fund may choose loss relief and have access to asset roll-over where the transferring entity transfers assets to the receiving entity on or after 1 October 2011 and before 2 July 2017.|
|New law||Current law|
|The temporary tax relief available under Division 310 for merging superannuation funds will be automatically repealed on 1 July 2022.||The temporary tax relief available under Division 310 for merging superannuation funds will be automatically repealed on 1 July 2019.|
Detailed explanation of new law
2.15 To extend Division 310, the application provisions for the loss relief and asset roll-over in the SLAA 2012 and the TLAA 2010 are amended to allow the provisions to apply until 1 July 2020. [Schedule 2, items 3 and 5, item 19 of Schedule 1 to the SLAA 2012 and subitem 11(1) of Schedule 2 to the TLAA 2010]
2.16 These amendments will operate for a limited time and will then be automatically repealed. The automatic repeal and savings provisions have been updated to reflect a repeal date of 1 July 2022. The repeal will occur two years after the end date of the legislation. [Schedule 2, item 4, table item 4 in subsection 2(1) of the TLAA 2010]
2.17 Updates have been made to provisions of the ITAA 1997 as a result of the extension of Division 310 and automatic repeal. [Schedule 2, items 1 and 2, notes 1 and 2 to section 310-1]
Application and transitional provisions
2.18 The amendments apply in relation to all transfer events that happen during the period starting on 1 October 2011 and ending at the end of 1 July 2020. [Schedule 2, item 6]
STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Merging superannuation funds
2.19 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
2.20 This Schedule amends the ITAA 1997, the SLAA 2012 and the TLAA 2010 to extend the taxation relief to merging superannuation funds which includes the provision of loss relief and an asset roll-over.
Human rights implications
2.21 This Schedule does not engage any of the applicable rights or freedoms.
2.22 This Schedule is compatible with human rights as it does not raise any human rights issues.